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UK investors show strong preference for physical replication ETFs


The results from the third Morningstar ETF Centre survey show a further strengthening of UK investors’ preference for physical replication ETFs and a growing aversion to synthetic ETFs on the part of prospective investors.

The survey captured a broad range of investors that are either interested in or already investing via ETFs. Out of 593 total responses, 501 came from individual investors whilst 92 came from professional investors, mostly advisers. More than half of all respondents have already invested via ETFs, with the remainder still familiarising themselves with these new vehicles.

Of those retail investors who are unsure whether they will invest via ETFs, 65% responded that they would like to learn more about them before investing. While this is a noticeable decline from the 77% of individual investors who responded similarly in Morningstar’s first survey – released in September 2010 – it remains indicative of the need for further education. Meanwhile, 64% of professional investors who responded that they were unsure whether they would use ETFs in the future cited a desire to learn more about them before deploying them in their own or their clients’ portfolios. This compares to a figure of 47% in the prior survey, marking a substantial uptick.

Despite ongoing efforts being made by providers of synthetic replication ETFs to improve the level of transparency and investor protection in their product lineups, respondents remain wary of swap-based ETFs. Amongst survey participants, 90% expressed that they were at least somewhat concerned about counterparty risk in ETFs (up from 82% in our previous survey), whilst 90% stated a specific preference for physically-replicated funds over synthetic-replication funds (up from 74%).

While there is still a need for further education, especially as it pertains to the variety of structures employed by various providers of exchange-traded products and the pluses and minuses associated with them, the appeal of these vehicles remains clear to both current and prospective investors alike. In particular, ETF’s low costs continue to resonate with investors, with 91% of current ETF investors and 93% of prospective users citing ETFs’ low costs as being either a “very important” or “important” attribute.

Ben Johnson (pictured), Morningstar’s director of European ETF research, says: “The results highlight the two-speed nature of the ETF market. On the one hand, an existing group of power users have been deploying these vehicles in their portfolios or on behalf of their clients for some time. On the other, a large and growing group of neophytes are hoping to gain a better understanding of the vehicle before putting it to use. Common across all respondents, is a growing and very strong preference for physical replication ETFs over their synthetic alternatives. No doubt spurred on by the flurry of warnings from global regulators earlier this year, 9 out of 10 investors are now “somewhat” or “very concerned” about synthetic ETFs.”   


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